As Refineries Close, New Stresses are Added to the System

Colonial Pipeline Co., which operates the largest pipeline linking U.S. Gulf Coast refiners and East Coast markets, will limit shipments of gasoline because orders exceed the company’s ability to deliver fuel on time.

The Alpharetta, Georgia-based company issued the requirement, known as an allocation, in a bulletin to shippers for the 70th cycle. The restriction applies to shipments on Colonial pipelines north of Collins, Mississippi.

Companies will be able to ship a pro-rated portion of their original nomination, based on their shipping history over the past year, according to Colonial.

With the assistance of Jane Van Ryan at API, I contacted to Steve Baker at Colonial Pipeline, to find out what is happening. I discovered the oversubscription seems to be related to refinery shutdowns in the Northeast.

Many of you will remember that Colonial Pipeline is the big pipeline that carries finished oil products from the Gulf Coast up to the Northeast part of the United States.

Map showing route of Colonial Pipeline

I live in the Atlanta area, so I remember when there have been gasoline disruptions because of inadequate supply. This has happened twice: once following Hurricane Katrina in 2005, and again in September 2008, following two gulf hurricanes.

When I inquired, I found out that there are really two parallel pipelines. One carries only gasoline products; the other carries distillate products. The line that is running short of capacity is the gasoline pipeline. (If only one is running short of capacity, it is not too surprising that it is the gasoline line. Distillate products like diesel fuel are now in very abundant supply; gasoline is at closer to normal levels.)

When I asked why demand was so high for gasoline pipeline capacity, one of the reasons mentioned was that shutdowns in refinery capacity in the Northeast were causing more demand for Gulf Coast gasoline. (If a refinery closes, it presumably will stop importing crude oil, and will also stop producing finished products such as gasoline and diesel. This supply needs to be replaced somewhere else.)

In checking in the news, I see two different refineries recently mentioned with shut downs:

This is a 192,000 barrel a day plant in Delaware. The story above indicates it was partially shut down early this year. No exact date for closing was given, but it sounds to be around the end of 2009, so the final shut down hasn't really taken place yet.

Sunoco idling Eagle Point refinery, slashing dividend in half
The other refinery closing was that of Sunoco's 145,000 barrel a day Eagle Point refinery in New Jersey. This may have taken place over a period of time, but did not finish until December 1, 2009. So at this point, we really haven't really felt the full effect of these two refinery shut downs. Even so, gasoline distributors are putting in more orders for gasoline from the Gulf Coast, to help offset the expected decline in gasoline refined in the Northeast.

Another reason Mr. Baker gave for the high levels of orders is that the price of gasoline on the Gulf Coast is relatively inexpensive now. If given a choice between importing gasoline from the Gulf or gasoline from Europe, gasoline from the gulf is a getter deal. So perhaps European supply is a little on the short side, or the falling dollar makes what is available more expensive.

It is not too surprising that refiners are shuttering refineries in the Northeast. These are likely among the oldest refineries, and oil consumption in the East has been dropping for several years, as can be seen on the graph above. Profit margins have also been low.

Will the refinery shutdowns in the Northeast cause a gasoline supply problem? With supplies as adequate as they are now, probably not, but it is a situation to keep watching. There are several different approaches that can be taken to make up the shortfall caused by the refinery shutdowns:

1. Oil that would have been imported by the two refineries that are being shut down can perhaps be imported by other refineries in the Northeast, so the refined product will still be available in the Northeast. The amount of capacity being shut down amounts to about 20% of total refining capacity in "PADD1" (the East Coast), and production has recently been running at about 75% of capacity. If the remaining refineries run at close to full capacity, the other refineries could theoretically make up the difference--but it would be a stretch.

2. More refined products (rather than crude oil) might be imported from Europe.

3. If pipelines are full, ships could be used to transport gasoline from the Gulf Coast to the Northeast.

So there are options that can work, as long as everything is operating normally. The question is what happens when there is a shortfall, such as from a hurricane, or a supply disruption from Europe. Then it seems like there may be even more buyers dependent on the Colonial Pipeline for supply.

One thing that is annoying (to someone living in Atlanta, anyhow) is that if more customers want to use the pipeline than the total capacity, it appears that all of the orders are prorated by the same percentage. The problem I see with this is a place like Atlanta is not on the coast, so is 100% dependent on what we get from the pipeline. If Atlanta orders are prorated because someone in New Jersey would like to order more gasoline, we are stuck with getting along with whatever is available (and possibly long lines at gas stations, as with the two hurricane situations). If New Jersey or Baltimore or New York are "shorted," they at least have the option of receiving shipments by sea, either from the Gulf Coast or from Europe.

I suppose with time, and the possibility with higher prices, this will all work out. But one doesn't like to see Colonial's gasoline pipeline already being utilized at of 100% of capacity, and orders being prorated, even before the two refineries that are being closed are fully off line. The system seems to have very little slack in it. Such systems are the ones most prone to disruption.

I am totally baffled that any refineries are staying in business at all, these days. I really do not understand the economics here. As oil prices sky-rocketed exponentially from ten bucks to nearly $150/bbl (from 1998 to 2008), gas price only more-or-less linearly rose from about $1.50 to (briefly) around $4/gallon. Presumably, all the economic hit of this difference came at the refinery level. Yet enough are still in business to keep most of our happy motoring ways humming along. I am left scratching my head (and not just because of my drying scalp).

Unfortunately for you, Gail, and my sister and many others in the area, Atlanta seems to be at the end (or really at the middle, which in this case appears to be even worse) of the pipeline, much like No. Dakota. It looks as though you North Georgians will be on the brave new forefront of adjusting to both an energy insecure world, and a climate/water insecure environment.

Last year ethanol plants were under the gun as corn feed stock prices rose and ethanol/gasoline prices collapsed. This year it appears to be the crude oil refiners facing the bullet. Those that shut down first are the least efficient or worst managed as in the case of ethanol.

But if oil consumption is falling in the Northeast there may not really be a problem for Atlanta. Ethanol is bumping up against the 10% blending limit and if it is raised to 15% some relief is in store. And European gasoline surpluses are well known as Europeans love their diesels. Plus falling consumption due to smaller cars, conservation or whatever would enable the remaining refiners to make up the difference.

Even before the refinery closures, imports to PADD1 seem to be dropping faster than PADD1 consumption. So the volume of products that were needed from the Gulf was actually rising slightly, before the permanent closure of these refineries. It certainly wasn't declining.

Colonial Pipeline looked at the question of whether to add additional pipeline capacity, and back in February 2009, announced that they had decided not to do so. This is a folder explaining why adding additional capacity was deemed so necessary (rising demand). But back in February 2009, the company announced:

Colonial Pipeline today announced it is delaying the proposed construction of a new, 460-mile pipeline to be placed mostly alongside Colonial’s existing mainlines from Louisiana to Georgia.

The system expansion, Project ExCEL announced in 2006, was designed to relieve a capacity constraint on the Colonial system, which supplies gasoline and other fuels produced at Gulf Coast refineries to customers and markets across the Southern and Eastern United States.

Current economic conditions have affected consumer demand for petroleum products and it is difficult to project future market conditions under these circumstances.

I am sure Colonial can figure out that what they need is a full pipeline. There is no point in constructing a partially used one. So they would rather put buyers on allocation, than build a new pipeline that is barely used.

Morning Gail,
Thanks for the post. I'm about 2 hours north of you and, as an aside, our 6 month old poodle puppies are out playing in their first snow. They take such delight in the world around them. They are often a nice distraction from things TOD.
Question: If there is an abundance of diesel, why has it gone up more compared to gasoline as of late?.
As for Colonial, I did some survey work for them in the 90's and we were often struck by the condition of the pipeline in areas. It seemed to me that they weren't investing a lot on maintenance. I hope that has been corrected, as we are more reliant than ever upon their services. I think that the additional set of pipes would have been a good idea, if only to add redundancy.

One cannot get any information from the Colonial website about the trend in maintenance budgets over the years. One would expect that the need for maintenance is rising, as the pipeline gets older and older. Colonial talks about it 46 year history, so one would assume that at least some of the pipeline is that old.

The owners of the pipeline are oil company affiliates. We know that some of them are cutting back elsewhere (for example, Conoco Phillips). So I would not be surprised if there is pressure to keep maintenance costs down.

Does anyone have any maintenance information for Colonial? Other than the two big outages, I can't think of any others.

My experience with large fluid flow systems (steam, gasses, liquids) tells me a couple of things: failures often occur in clusters and usually occur when the system is at full capacity. Unlike the Alaska pipelines, the Colonial and Plantation systems are mostly in-ground and hidden from external view. They use "pigs" to survey the condition of the system from inside, visually and using ultra-sound, etc. To do this properly, sections of the system must be taken out of service, sometimes for extended periods. My bet is that there is a lot they don't know about their pipelines.

Besides just getting older, aren't these facilities having to handle more and more acidic (sour) crude? I would expect that the combination of old facilities and ever more corrosive liquid running through it would spell disaster for many of these operations. But perhaps I'm missing something.

WASHINGTON -- Colonial Pipeline Co. has agreed to pay a $1.5 million fine, spend up to $2.5 million for new outdoor public recreation facilities, and to restore natural resources in and around Sugarland Run and the Potomac River, repairing damage from a massive 1993 oil spill from the company's pipeline in Reston, Va.

The proposed settlement was lodged October 21 by the Justice Department in U.S. District Court in Alexandria, on behalf of the U.S. Environmental Protection Agency, Virginia, and the District of Columbia.

The spill, which occurred in March 1993, released about 407,000 gallons of diesel fuel into Sugarland Run. Despite emergency efforts to contain the spill, about 48 square miles of surface water, shorelines, islands, and wetlands were contaminated. The entire length of Sugarland Run was severely contaminated, threatening water supplies in Virginia, Maryland, and the District of Columbia. The oil flowed down Sugarland Run and into the Potomac River, creating oil slicks on the river.

This could get to be a problem for people up in my neck of the woods-northwestern NC ,SW Va.

I have a friend who drives a gasoline tanker.During the last delivery crunch when he couldn't load at the usual terminal, his company was trucking gasoline all the way from the coast and some stations ran dry in this area.

There is a particular list of states in PADD 1. In fact, there is a PADD 1A, which is New England; PADD 1B which is Middle Atlantic; and PADD 1C which is lower Atlantic.

The EIA has any number of data exhibits that are available by state, or grouped into PADDs. For example, on this sheet. If you click on the drop down menu that appears on this sheet, it will give you a list of precisely which states are in PADD1. It is pretty much the list of states that border on the Atlantic Ocean.

PADD is a left over from WWII. You have to remember that continent spanning pipelines and interstates are a fairly recent development. It use to be only railroads could move resources from one part of the country to another. So planning was that much more restricted. If I remember correctly they were set up along the lines of geographically isolated areas (for that era).

"The United States is divided into five Petroleum Administration for Defense Districts, or PADDs. These were created during World War II under the Petroleum Administration for War to help organize the allocation of fuels derived from petroleum products, including gasoline and diesel (or "distillate") fuel. Today, these regions are still used for data collection purposes.

The Petroleum Administration for War was established in 1942 by executive order, and abolished in 1946. The districts are now named for the later Petroleum Administration for Defense which existed during the Korean War. It was established by the Defense Production Act of 1950, then abolished in 1954, with its role taken over by the U.S. Department of Interior's Oil and Gas Division."

Gail – I’ve seldom dealt with the pipeliners in any great detail but I do understand their basic economic analysis. Just like with oil/NG drilling projects the time value of money is a huge factor. In their case it’s not the price of the products they transport that greatly determines profitability but volume. Most p/l projects, either products, oil or NG need a certain minimum through put to justify. If I want a NG transport company to pay for a line to transport from my well they’ll do their own independent analysis to make sure I have enough volume to justify the investment. Given the PO conversations and the fact that a lot of imported product could by pass them via sea transport to the east coast they are probably justified in their hesitation.

Not sure if it would be practical or if the end users would want to put themselves on the hook, but they could develop a utility-like arrangement where the p/l company is guaranteed a minimum return for the expansion investment. But that brings up the same problem some utility customers are starting to face now: reduced consumption requires price hikes to meet the minimum return. Basically it boils down to the cold hard fact that if consumers want guaranteed supplies they are going to have to pay for it.

A very big factor dax. Initially lack of p/l's appeared to be a looming factor in the NE TX/LA shale gas plays. But the high rig count and impressive initial flow rates got them spending big bucks on p/l expansions. Haven’t seen any detailed analysis but I suspect those pipeliners are more then a little nervous today. I doubt they planned on long-lived wells but based their economics on a continued high rig count. Now with the drilling activity way off they have to be worried. As a very crude measure most major p/l projects take 4 to 8 years to recover the initial investment. But that's based upon volume assumptions. They may be hitting those volumes today but a couple of years out they could be in a lot of trouble.

“Y’all need to get a plan set up to have a secondary distribution system that will allow us, if a storm occurs on the Gulf Coast, to get gasoline delivered to this area,” he said.

Rucho is urging oil companies to put plans in place to truck gasoline to Charlotte from tankers along the Carolina coast or from other tank farms in Virginia if pipeline problems cause another shortage.

This week, Gov. Beverly Perdue said she's confident it'll happen.

“If an event happens, North Carolina's prepared to be expeditious in our response -- unlike we were this time last year,” she said.

As refineries close for financial problems, there is likely to be less US demand for unrefined crude. Instead, we will be looking to buy refined products. There are different pipelines for refined products than unrefined crude, so there can still be strains on one part of the system, even if in total the amount looks to be lower.

I think with the oil system as with everything else, it is Liebig's Law of the Minimum that applies. If there is a major pipeline repair that is needed, or a storm outage, or an electrical outage, the system comes to a halt. There are theoretical ways around a problem (trucking gasoline to destinations), but they don't work well, because of the volumes involved. If multiple systems can be set up in advance--gasoline by boats from the Gulf to the US Northeast--that is more protective.

Gail -- regarding your comment about a greater US dependency upon imported products it's a good time to remind folks of a significant development IMO that had very little (if any) notice by the MSM. I saw one report several weeks ago noting that the prime minister of Aruba saw no reason to stand in the way of the Chinese acquisition of the Valero refinery in that country. If memory is correct this is the second largest refinery in the western hemisphere and most of its products are shipped to the US. Add that to the major Chinese acquisitions of Vz crude oil, I think it's a fairly obvious business plan on the part of the Chinese.

With regards to the plans that KLR noted above of the NC politicians to force refiners to set up secondary distribution I can't think a more significant motivation to make Colonial suspend any thoughts they had about expanding their p/l system. Those unintended consequences slap us again perhaps.

I hadn't noticed that the Chinese wanted to buy up the refinery in Aruba, but with all of their mineral-related purchases elsewhere, it stands to reason. Thanks for pointing this out.

I realized that perhaps I should have looked farther. I see that Valero on September 30 was reported to be closing 235,000 barrel a day refinery in Aruba for economic reasons. It had been shut in in June for 2 - 3 months.

Shell is considering closing the Montreal East refinery in the near future. Since the US currently imports some gasoline from Canada, this could reduce the availability of such imports.

With margins as bad as they have been, it would not be surprising if there are others.

I know this is off topic, but your post made me want to mention a few things regarding China, and its massive investments in Minerals/oil/lng ect and the conventional consensus surrounding its dire implications for the U.S.

I understand as well as anyone, the "risks" of the US being so indebted to China, or any other nation. I can understand many people holding great concern, and even outright fear, of what China could to the U.S. if China so chose to harm us, economically. No doubt, damage could and would, be done.

That said, I would like to now point out a few things most people are not aware of. I know we all come here, from diverse backgrounds, with unique skill sets, and we all come here for different reasons. I have a serous interest in Geo-political grand strategy, and food and energy security. I incorporate what I learn here, into my theoretical Geo-political "gaming scenarios".

One of the more nasty, but unappreciated tools of American power, is food. If China desired to engage in "Monetary conflict" the United States is far from defenseless. In fact it is quite possible, that if China so wanted to engage in "monetary conflict" this economic crisis has only served to strengthen the United States, and its leverage over China.

Wile the United States Exports more Wheat, then anyone else, China grows more Wheat then anyone else. Today, demand for wheat inside of China is only growing. This said, the more the "middle class" is developed in China, the more you have people moving up the "Food chain".

Consuming more meat. Cows require a lot of feed, -AND- water to produce meat.
Given "climate change" China's water supply, from the Himalaya mountains is shrinking.
Some people suggest the shrinkage is vast and drastic.

Everyday, without intended to do so, China is growing more dependent on our farms. In the event of "Monitairy Conflict" with China, no US congressional official could move to block wheat exports to China, because that would be "Protectionist".

However, if China choose to engage in "Monetary conflict"... Given our growing fiscal deficits, it would be "politically sell-able" for the US to cut not only U.S. farm Subsidies, but farms in other nations that we support and assist as well. In fact, many Nations have been demanding the U.S. cut farm subsidies for years now.

If we did this, it would then send the price of Wheat, thru the roof.
Just as China "dumping" U.S. debt would hurt the U.S. more then it would China....
These actions taken by the U.S. would hurt China, more then the U.S.

It should also be mentioned that China alone, imports 70% of ALL US Soybean Exports.
Again, No U.S. congressional rep could/would/should block the sale of the soybeans to China.

However, if China wanted to engage in "monetary conflict", I believe everyone here would agree that such a move would cause a rise in oil prices. Such a spike in fuel costs, will result in the U.S. congress mandated X amount of Soybeans be used for "Bio-Diesel" buses.

Of course, our doing this would have nothing to do with China... [cough]
we would just want more "green" and cost effective public transport.

Yes, China can cut our credit supply and it would be truly awful and damaging to our economic stability as a nation. But! We can raise intrest rates, and survive it. However, The U.S. can make drastic, and FAR more damaging cuts to China's ability to feed its people.

Further, if funding for U.S. AID food assistance operations throughout Africa, were to be cut drastically, or completely: The African nations that China is increasingly investing in, and dependant upon, for mineral and energy production could be reduced to famine stricken, failed states, in a matter of weeks.

I would wish to present these thoguhts further, but I am so off topic, I will end here.
Just food, for thought. [Pun, intended]

You make some good points, but I think it is difficult to figure out all of the linkages. We have already discovered price doesn't necessarily go up. If credit unwinds, it can go down as well, and credit unwinds are a very definite impact of oil shortages.

We need oil to grow our wheat and soybeans. If we have to barter, the food is likely to go to a country that can give us oil to enable to keep our system going--Saudi Arabia or some Middle Eastern country perhaps. But if our only problems are with China, and prices go up, maybe things will be as you say.

Blue -- I see matters much the same as you. I don't consider my position debatable...just an unprovable opinion. As Gail correctly points out there are many variables. But my vision is more of rather grand joint venture between the US and China in the future. We have a market for their goods and the food to feed their population. They have the US $'s to pay for our crops. And by supporting our debt they allow us to keep our unsustainable consumption going forward for a while longer. Between their economic moves to tie up resources and our military/political power to keep their resources secure I see it as match made in heaven. Or hell if you happen to not live in either country.

I think in general you might be right however what happens to Korea and Japan ?

Asian politics although quiescent since WWII are far from dead. And of course the Russian/China/Japanese issue can heat up again. I'd argue nothing has intrinsically changed in Asia at the political level its just up till now the deep problems have been papered over. Everything that was a problem before WWII has not been solved.

Korea is esp problematic. And of course Japan has a very painful choice wither quietly in its old age or resume its militaristic approach. I personally don't think Japan has much choice and suspect they will rearm if US/Chinese relationships become to cozy.

We could even see some really strange things develop like a Russia/Japanese/Korean alliance vs China/US.

Certainly depending on how things go we could well see some people switch teams if you will.

A Brazilian(South American)/Chinese alliance vs the US/Russia could even happen.

In a sense we simply don't need one of the worlds major economies. This could be expressed as a general reduction of all the major economies or as collapse of one of the big countries somewhere in the world. I tend to think that it makes more sense for one of the big players to eventually crumble rather than a continued general contraction.

If so then a Orwellian like rearrangement makes a lot of sense as the status quo is shaken. Asia, Europe, South America and of course Mexico all I can see is the high probability for things to change fairly dramatically in some way how who knows. Mexico's collapse is probably something impossible to bet on as you can't find someone to take the other side. How that will ripple through international relations is difficult to determine. Does China save Mexico ????

I agree with you memmel: all kinds of sub plots possible. Japan seems to be latching on Indonesian/Austrailan LNG as a future lifeboat. The EU appears to be figuring out how to deal with Russia. With all the different plots going on there's bound to be some interesting unintended consquences. It would be amusing to watch if there were't some truly scary possibilities.

FIRST: I thank all of you for your VERY thoughtful and respectable replies. I was not sure, I would get such kind responses! lol. It is TRULY nice to see measured, thoughtful, mature responses.

That said... I think it is possible that China, and most of Asia could suffer political and economic collapse very quickly, and with little warning. I understand many may not agree... and I respect that. But just some things to consider:

When the property bubble in China pops the way ours did here in the US, people are gunna be upset with the Chinese leadership. I think its gunna get nasty.

Another "wild card" to me, is the DPRK. [North Korea] If there is a coup attempt when Kim "eats it", [Highly Possible!] your going to have some very awful things happen in Asia. If its anything like the Berlin wall falling, it could be catastrophic for the entire region.

Your going to have a possibility, if not probability, that North Koreas FLOOD into South Korea, and parts of China. I think China would post troops around the border do that North Koreans could ONLY go south.

If this happens, South Korea is going to take a MASSIVE hit, economically. Literally MILLIONS of unskilled, malnourished, poverty stricken people... basically, "invading" the #3 Economy in Asia.

[It should be noted, that Germany is STILL struggling with the effects of 1989 today]

Unrest in China... would be pretty awful. I've seen a lot of people say that a "revolution" in China would doom the dollar, but... frankly I think people would run to buy up US bonds, just to seek safety. At least until the world had a "Clear" idea as to what laws/form of Gov China was going to have in place next.

But that could take half a decade before a "democratic China" got "investor trust"...
and what would be the investment prospects by then?

But again... If China "goes", its very possible there would no longer be a government in Asia that supported the DPRK. So, I think it would be fair, to say that a political collapse in China, would also result in a collapse of DPRK as well.

Be this the case, suddenly, the #1 and #3 economies in Asia, just took MASSIVE hits. If I am an investor, I park my money in the US and EU... and don’t even think about investing in Asia for perhaps a decade?

When the USSR fell, the money was raided and sent thru NAURU [http://en.wikipedia.org/wiki/Nauru#Economy] and then invested and hidden in the "west". I don’t see why it would be much different this time if the Koreas AND China had civil and or political unrest that resulted in a collapse of one, two or all three.

And be the worst case, a "Fail" of all three, come true...
I think suddenly the EU and US investment prospects would be the only games in town.

I'm not saying any of this to argue. Just things to consider. I VERY MUCH hope, that the U.S. and China and the world can "just get along" but... with so much going on in ESP in Eurasia with religious fanatics, and nationalism... and so much going on Geo-politically with Oil and LNG... I cant see a good ending.

Armenia and Azerbaijan are "on the brink". And there is now ALL SORTS of fights going on in the region over the electrics grids, and access to water supplies that allow the dams to produce electric. This cant possibly end well.

I feel a need to question if Asia is really on "the rise"... or... on the way down?

Very nice summery of the real world out there Blue...thanks. Many might disagree with some of your points. But then many of them would have said that the old Russia and the Sha of Iran would never be toppled. If you're not familiar with the "Black Swan" book I suspect you would find it interesting. One characteristic of a BS is that almost no one sees it as a possibility. One of the more important points I took away from the book was that while one might believe that X is very unlikely to happen it doesn't mean you can take steps to minimize the negative effects or even take advantage of the situation if it does, in fact, happen.

How many would think the gov't of China could ever fall via the efforts of the common man? But King George thought the same of those damn colonialists, the Russian gov't thought the same of those crazy Afgh's attacking tanks on horseback and the Sha, with the third largest attack helicopter fleet on the planet, thought the same about his rabble.Like a man once said, it's not the dog in the fight but the fight in the dog that often determines the outcome.

You are right. Plantation Pipeline goes part way, from Louisiana to the Washington DC area. I don't see any notices that it is "on allocation" at this point, so it may have capacity for its piece of the journey. It could help take pressure off Colonial.

Steve Baker told me that Colonial had been allocating capacity now for 11 five-day periods, so this has been going on for quite a while. If Plantation were a real option, it seems like it would have solved the problem. Maybe a major part of the shortfall is for the Northeast area.

Well, of course I`m not an expert but weren`t Stoneleigh and also Kunstler saying that gas shortages would occur before too long? Maybe before too long is sooner than we expected. It does seem like almost everything in the economy is changing, large scale operations become losing propositions. I can see many shut down stores and vacant offices around my area so why should the oil business be any different? It seems like it`s just another business in the end. If it doesn`t pay then that`s it, lights out. It seems like a fragile business actually, with so much product so far away and so hard to come by because it`s miles down under the earth. And for such a luxurious hard-to-get product you must have a wealthy clientele otherwise it just isn`t worth the trouble........

Actually, gas shortages might be beneficial because they`d spur people to localize faster. Of course I know such a situation would freak a few people out too....my car-loving, automobile-dependent relatives over there for a start!!

The Atlanta area is one of the most car-dependent areas in our very car dependent country. It must have freaked some out pretty badly when they went from gas station to gas station with no gas available in almost any of them.

And of course we are all very, very dependent on water, another liquid that was at risk of shortage a while back in the same area, as I recall. Either shortage would be really bad. If both hit at the same time, it's going to be truly horrific around there.

Any thoughts of jumping ship, Gail? Your posts here are too precious to have you go down in a blaze of post-sprawl, mad max insanity.

The water shortage had a lot to do with too many electric power plants for the Georgia / Florida /Alabama area. I understand they very nearly had to take one of the big nuclear plants out of service for lack of water. This is still a very big part of the problem. We actually get quite a lot of rain. Wikipedia says Atlanta gets 50.2 inches (1.275 meters) of rain a year. This is more than almost any other major US city.

Yet the Chattahoocee above Lake Lanier is not much more than a big trout stream, as is the Chestatee. The forests that still exist in the watershed above the lakes act like a big sponge, releasing the water slowly over time, nature's form of a controlled release. Its a wonderful thing until you exceed the capacity of the system. That is of course what is happening now, hence the water wars. Westpoint Lake, below Atlanta, is a mess. If I lived below Atlanta, I'd be pissed too. Some of the areas in north Ga. average as much as 60 inches/ yr. but the watershed just isn't that big. We just hit 65.50 inches so far this year (we're in the TVA watershed, but not far away). Not sure how to solve this one.

Its more than that, IMO. These pipelines are part of our essential infrastructure, similar to the interstate system or the power grid. In fact, even more so. If an interstate bridge goes down there is almost always a work-around, a detour, and the effects are generally local. If one of these pipelines fails, as in Katrina, the effects are widespread and enormous. That's why I feel there should be required redundancy built in. Ships and trucks have no hope of keeping up with demand. Further, these pipelines are vulneralble in ways that make our reliance upon them a huge liability. If the bakery down the street goes out of business you just drive to the next one. If the Colonial pipeline goes out of business, all of the bakeries do too, and you're probably not driving anywhere.

You make a good point. These pipelines, especially Colonial are really essential.

The EIA keeps pretty close tabs on refineries, but my impression is that pipelines kind of fly under their view. Pipelines seem to be joint ventures of oil related entities. I don't know if anyone really watches over them. If there are leaks, the EPA comes after them, after the fact.

It seems like leaks and general deterioration are the biggest concerns of the pipeline companies. See this paper.But an electrical power outage (outside of the pipeline's control) was what caused the big Katrina outage. If someone intentionally tried to blow up the pipeline, that could cause a huge problem. Or earthquake damage (mentioned in the presentation) could present a major problem.

Nice get. It'll take a while to work through. I noticed the ARC-GIS portions. That's what I was working on in the early 90's. We had a helluva time standardizing across platforms and data types, etc. Everyone wanted their own proprietary piece of the pie. Data conversions and accuracy were big, expensive issues. We ended up scrapping years of inaccurate data and starting from scratch in many cases. We did the same type of work for Southern Co. and their grid. Neat work at the time, converting paper drawings to highly accurate relational GIS databases. Our first GPS was a backpack that weighed about 40 lbs. My first laptop was an IBM tablet (286/20), about $8K, that was cranky as hell, but I was in heaven. It seems we've come a long way, but then again......................sometimes I miss Windows 3.2 and DOS. Where has all of this taken us?

The oil business, like any other business, is reliant on energy flow to power the necessary flow of materials and if that energy flow isn`t there then the business can`t function. I`m sorry if that isn`t what you wanted to hear, by the way!

Perhaps because of humans` long experience with steady supplies of solar energy (crops, water power, windmills, etc) we couldn`t process the information "one-shot deal" when we encountered petroleum energy. As a culture we simply had no experience with a one-off type of energy regime and so we couldn`t make a rational plan. It seems more and more clear that that is what happened.

But perhaps next time (if there is a next time) we won`t be so stupid!

I think Stoneleigh's reason for saying that gasoline will become unavailable is that she sees the economy heading for a hard reset. A lot of just-in-time supply systems will be disrupted by the ensuing chaos. And we've been slacking on routine maintenance for a while now. So once the refineries and pipelines drop below MOL, gas stations will close and there won't be an easy linear path to get it all restarted. The well-to-do will still be able to obtain hydrocarbons through private delivery.

In other news, Wile E Coyote will find that the canyon floor reduces his rate of descent.

I'm not sure I know what to make of the closing of the Valero Delaware City refinery.

While this is an old refinery (commissioned in 1956), has changed hands at least four or five times, and historically has had an atrocious environmental/safety record, Valero HAS invested several hundred million dollars in upgrades in the short time it has owned it.

The refinery, in it's present configuration, is designed to handle heavy high-sulfur crude. One would think that would make it a very profitable operation, given the supposed growing scarcity of the good stuff. However, Valero claims that that price advantage of heavy high-sulfur crude is no longer as great as it once was and is not enough to offset the higher operating costs.

Supposedly, Valero had unsuccessfully tried to sell the refinery, but evidently couldn't find any buyers. I could see Valero mothballing the refinery until more favorable economic conditions prevail, but to just walk away from such a huge investment is puzzling. Perhaps Valero as a business is highly overextended and is extremely desperate to maintain adequate cash flow.

This kind of volatility in such a vital economic sector is extremely disturbing and even downright dangerous from a national security standpoint. How can we maintain even a minimally stable energy infrastructure if the major oil companies and refiners are treating major facilities with no more permanence than property cards on a Monopoly board?

My suspicous side sometimes whispers to me that perhaps the oil industry (including the refiners) would not at all mind a crisis in the supply chain of refined products and may not be trying very hard to prevent such from happening. (No legally actionable collusion required here, just the big players knowing what needs to happen for a mutually beneficial outcome.)

The way things are going, it looks like we are not only going to be increasingly dependent on imported crude but also increasingly dependent on refined product. Not good.

Ghung -- But that doesn't fit their supposed sale of Valero Aruba to the Chinese. I don't study refiners but it might be nothing more then a corporate reorganization driven by whatever factors.

Can't find the right chart but I know historically the refiners make their best returns when product/oil prices are at their lowest. It's their operating margins that determine profit. And high oil prices tend to push those margins very low.

The cumulative shortfall in Saudi net oil exports, between what the they would have (net) exported at the 2005 rate and what they actually (net) exported was 840 mb, from 2006-2008 inclusive, as US oil annual oil prices went from $57 in 2005 to $100 in 2008.

On the import side, the US and China are respectively prime examples of the OECD and non-OECD responses to rising oil prices.

The cumulative shortfall between what the US would have (net) imported at the 2005 rate and what we actually (net) imported from 2006-2008 inclusive was 687 mb.

The cumulative increase between what China would have (net) imported at the 2005 rate and what they actually (net) imported from 2006-2008 inclusive was 839 mb.

This pattern is what I expect to see in the future--OECD and non-OECD countries battling it out for a share of declining net oil exports, with OECD countries generally being forced to reduce their consumption. I had been expecting more of a short term decline in US demand, primarily because of large anticipated reductions in government payrolls and government services (initially local & state, with the feds joining in later), but the stimulus spending is apparently postponing that day of reckoning. But I do think that the longer it takes for another downward leg in US consumption to occur, the less impact that it will have on global net demand.

Most companies, most governments, and most individuals are essentially basing their economic decisions on what I call the FIM--the Fantasy Island Model. On Fantasy Island, oil fields don't deplete.

In my opinion, a more realistic scenario is that oil importers worldwide, in just the past four years, have already burned through 20% to 25% of our post-2005 global cumulative supply of net oil exports.

In any case, based on our export models, governments worldwide are doing precisely the wrong thing at the wrong time--by encouraging consumption, when we should be doing everything possible to discourage consumption.

The oil infrastructure is now made up of a huge number of individual operations, each of which is treated as a profit center. We are seeing that owners are willing to walk away from them, and let the rest attempt to pick up the pieces.

I am concerned that the electrical industry now isn't all that different. With deregulation, there are lots of little separately owned components. Electrical demand is down now because of the recession, so it is difficult to make enough money to cover costs without rate increases. Adding renewables to the system further stresses the system. Some of the pieces are regulated in such a way that they can't go out of business, but I bet that some other pieces will find it increasingly difficult to pay off their debt, or will find it difficult to meet environmental regulations, and will shut down. I don't know enough about the industry to know whether this could cause a problem, but if it is an essential piece, it seems like it could.

Written by Joule:
I'm not sure I know what to make of the closing of the Valero Delaware City refinery.

The refinery, in it's present configuration, is designed to handle heavy high-sulfur crude. One would think that would make it a very profitable operation, given the supposed growing scarcity of the good stuff. However, Valero claims that that price advantage of heavy high-sulfur crude is no longer as great as it once was and is not enough to offset the higher operating costs.

I recall a news report from a while back claiming OPEC increased the price of their sour crude to reduce demand as their method to cut production to force prices back up to ~$70 per barrel. This means that the bulk of OPEC's spare capacity is sour crude and there is currently no shortage of light sweet crude oil. The companies that invested in refinery capacity for sour crude during the price run up in 2007 and 2008, are now seeing their investments fail because the price of sour crude currently make refining unprofitable. The Valero Delaware City refinery seems to be a victim of OPEC's supply cutback a year ago. When demand for crude oil rises or production of light sweet crude oil declines causing supply and demand to intersect, the refining capacity for sour crude oil will not be in place. This means that OPEC's effective spare capacity is overstated. This combined with Export Land Model is going to cause a global supply crunch before most analysts expect.

I have a post in the works. After that then we can talk about hypothesis.

However as usual sht happens I got laid off on Friday so I'm doing a bit of scrambling. So far things look good but put a bit of a dent in working on a post.

However even before I get that out think about it why on earth after all the events that have happened would you expect that the truth and whats been reported to actually be similar ?

I'd think even without proof that people should be a lot more suspicious about whats happened. Things simply don't add up.

Heck back when Atlanta was having serious shortages after the Hurricanes it was barely reported in the news.

Maybe just perhaps if you look at all thats happened the truth is pretty simple the world is already seriously short oil.

A very simple effect that happens when you try and control prices in the face of a shortage is that you have supply problems. Does it not make sense give that oil is "cheap" now that perhaps the attempts at price control are causing the classic shortage issue when the free market does not set prices ?

Consider that if we have had and attempt at price controls then obviously you have to have some means of rationing or they fail quickly.

So did we have A or B occur ?

A.) After the rapid economic collapse and hurricanes a savvy group of oil traders bought up the stranded oil and later used it to push prices down and buy up even more then held it for months betting OPEC would cut and hold prices allowing them a nice profit ?

B.) The economic collapse and formation of a large supply of oil stored off shore where not unrelated events. The hurricanes of course added icing to cake. And this stored oil was steadily rationed to keep prices contained and help slow the economic slide to manageable levels. Thats not to say everything went smoothly but all and all it seemed to have worked.

Is it A or B ?

And as I said of course eventually if it is rationing/price controls then as always it will fail. Regardless of how powerful you think you are you can't pull it off forever.

So classic economics at work or a set of coincidental negative and positive events ? After oil hits 140 a barrel ?

LOL I already have a interview I'm setting up. Took six hours from the time I got the news to find someone interested. Dunno what will happen but given my skill set I probably will find a job I could well take a big pay cut but I expect to see this over the next several years already I lived through steady pay cuts after the .com crash so it won't be the first time as long as I can work I'll be ok. I have zero debt and as needed rent a cheaper place. Whats interesting is like everyone its seems health care is the one issue thats a real sticker since I have kids. I've never come up with a good solution for that one.

Also this was not unexpected we where bleeding cash so I knew it was just a matter of time however I did not see the job market changing much so I decided to see if I'd get a decent severance and I did so...

Its actually a bit funny since I work for our London office and am just paid out of our US office. They kept my group but axed me in a generic cut but they kept the London office. Of course my CEO does not realize I wrote a lot of the core software for the product out of London that was doing well. My CEO won't even be talking to the London group till next week I'm interested to find out what happens when my boss tells him he axed one of the core programmers for the product he wanted to keep :) Its a big enough company that he does not know exactly what I do and no one in the US does since I don't work for them so I understand why this happened.

Certainly my group can make without me anyone who thinks they are not expendable is a fool however I must admit I find the situation a bit amusing :)

I guess I should not be laughing but its me that got the shaft but still its friggin funny. Its a Japanese company so I suspect they will just act like no mistakes where made no losing face but still ..

What I find really sad however is my group is small so cutting me is a huge blow to our capabilities on numbers alone it will make it significantly harder for them to succeed just as tremendous pressure is applied. So it really stacks the deck against them. They are good so they might pull it off but also the other good guys might just bail given the situation. Normally I leave well before this but like I said given the job market I felt gambling on a decent paid vacation was worth it so if I'm lucky I'll land on my feet.

If I'm really really lucky then I won't be able to find a job and will have to go learn to be a machinist I'm really tired of the computer business I've been involved for a long time and seen it all before. The same mistakes over and over again with truly new and cools stuff exceedingly rare. So in my heart I want out and I want to work with my hands as best I can given some physical constraints I have ( partial paralysis) not something I hide but its hard to do serious manual labor when you can't even lift a gallon of milk or a full glass of water. I believe I said that some of my problems communicating may be related to a car wreck and resulting brain damage but I also blew a disk in my neck did not fracture my spine thank god but quite a bit of nerve damage. I've had spinal surgery that helped a lot esp with the pain but ...

I'm bringing it up to some extent in this post to some extent just to let people know I really don't want to be a programmer but for a lot of reasons I don't have a lot of choice and one is physical. Of course certain writers make harsh assumptions about me that are simply not true since they don't know me. I really do want out of this BS world to build real stuff people need but you have to live as you can and programming is a world where its fairly easy to do good stuff even if you have some physical problems. I just recently lost a lot of the use of my write arm, fine motor skills still intact thank God so this does weigh on me. But you live life as best you can and this time around its getting slowly better.
Neurological problems are messed up some stuff works some does not no matter what your brain tells the limb to do. I'm thankful its just my upper body :)
Of course my physical therapy sessions aint gonna happen arrgh ...

Anyway perhaps to much personal info perhaps not but I hope at least a few people will be a touch more careful about judging people online. Its easy enough to make mistakes in person much less over the Internet. Sorry for the long reply but I have to imagine many people are having problems now and if your peak oil aware I think it makes it tougher and easy to fall into depression. So a bit of personal info will I hope help other people as they face the coming problems. Despite my doomerish meta view point I'm honestly really happy and outside of medical care for my kids I really don't have a lot of true worries I guess I mentally tuned out years ago I'm not sure what last piece of crap actually caused it but I do know I left the rat race mentally long ago. If you don't leave mentally and take the physical chances when they come then your probably going to have a really hard time if you face trials that are probable in the future.

I'm down to food,clothing, shelter playing with my kids and hopefully basic medical as what I care about all the rest seems to have simply disappeared over the years.

I am most assuredly not a machinist but I worked in a large integrated shop once as a welder that did all sorts of repair and fabrication as well as offering a full line of custom machinist work in a busy industrial town.

This was in the pre computer days and there was a lot of fairly heavy physical work involved then.

I expect that since everything is mostly computerized these days , and guys wanting to do this kind of work who are really good on computers are to find even in a down economy,you can find a job easily if there is any industry nearby.

Fwiw, I hear that there has always been a chronic shortage of guys willing to work on cars who really understand computers and computerized controls.The trade schools teach mechanics the basics of running down problems by running various tests according to a decision tree.Apparently that's not always enough-I know that there are busy manufacturers reps out there who are called into dealers shops as a last resort, and I have reason to believe these guys are way better trained in computers and electronics than your ordinary mr goodwrench.

Cars and trucks are going to be around longer than you and I will be.There might be a real opportunity there for you since you are tired of the desk and skull work routine.

It is rather common for auto nuts to pay out good money to have computers reprogrammed .I have no idea how long it might take to learn this specialty but you can leave a computer , go get something to eat, come back for it , and pay out anywhere from fifty bucks for a cash "on the side" job on up to several hundred dollars for something that apparently uses up nothing but a little time once you have the data needed.

Near the end of grad school in chemistry I really wanted to go into sensor and now fabrication CNC stuff.

I designed my new web browser to allow integration of a cad/cam system even downloaded a open source one a while back.

Think of a Web client/Server that can build stuff for you and you get the idea.

As I get my project working better this little wake up call makes me want to really peruse this angle. I think as things get more messed up the ability to make spare parts for people will be cool esp if you can do it over the web.

No, memmel, C happened. When OPEC cut production to force the price back up last year, they raised the price of their least profitable grades, sour crude oil, to reduce demand putting the economic stress on the sour crude refineries.

Dec. 5 (Bloomberg) -- Crude oil prices are in “the right range” and there is no need to reduce inventories, Saudi Arabian Oil Minister Ali al-Naimi said ahead of an OPEC meeting scheduled for later this month.

“Inventories are coming down, the price is perfect, and all investors, consumers, producers -- they’re all very happy,” Al-Naimi said today in Cairo, where Arab oil ministers are holding an annual meeting.

Algerian Oil Minister Chakib Khelil said it will be “some time” before oil production will have to increase. The Organization of Petroleum Exporting Countries, which supplies about 40 percent of the world’s oil, cut crude production last year as the global recession curtailed demand.

* Peak Oil took place in 1998
* when oil cost @12 a barrel. We have been on the downslope for ten years.

Turns out its 2002 by a whisker over 1999 they differ by a whopping 670kbd.

You may one small mistake the lowest price did not result in full capacity usage in 1998 so the price increase brought a bit more production online in the following years. 3.37 mbd spare capacity from the price low in 1998.

If you think about it a bit it makes sense that the actual production peak followed the price low if the low resulted in significant spare capacity.

Which seems to be the case.

Send me a email and I'll send you a draft you almost nailed it and I cheated to figure the above out :)

Your one of the few they basically got it right.

And I know I'm plastering Gail's thread with my own stuff but hell I lost my job yesterday I'm not buying a shiny new EV or Ethanol powered roadster regardless of if I get a new job or not. Of course our glorious leaders don't realize that I've just joined the swelling ranks of people who or not going to borrow a dime.
Not that I was not there any way but I was thinking about buying a EV if I could pay cash for it once they came out. No way in hell now would I waste my cash or take the risk of a loan now. I'll buy the gas I can or take the bus or ride a bike my little personal crisis cured me of thoughts I could be one of the few that could buy into the happy motoring EV future. And I assure you I'm not the only one that wont bite no matter how much cash I have since I've lost my security. To many people are going to hunker down just like me I think its simply to late to sell EV's and Ethanol/NG cars. Earlier this concern was theoretical but now its personal and obvious. Not in a million years sorry.

"Inventories are coming down, the price is perfect, and all investors, consumers, producers -- they’re all very happy," Al-Naimi said today in Cairo, where Arab oil ministers are holding an annual meeting.

Translation: Don't you dare contemplate switching to another fuel while I empty your bank accounts into mine and wreck your country on the falling edge of peak oil.

Price controls are set by governments. I do not see any evidence of prices being set by governments. Rather, I see prices have fallen because demand dropped significantly worldwide. In the US alone we went from 21.7 mbpd to 19.8 mbpd, a solid 10% decline. And before you argue that a 10% decline should cause a 10% decrease in prices, I will remind you that prices are set at the margins. We did not see a 10% price increase as US consumption went from 19.7 to 21.7mbpd before the recession. Instead we saw a non-linear rise in oil prices. Thus it makes sense that as we head back down the consumption slope due to reasons other than declining production that we would see non-linear drops in prices. And we have.

Therefore, to bolster your position, you must demonstrate evidence of government manipulation of the price structure in an ongoing and constant attempt to set prices. I have seen no evidence of this at all in the oil market. If you lack such evidence, your assertion is dead on arrival and null before you even submit the paper to Nate. If you have such evidence, it ought to go to any of numerous congressmen or senators who would be more than thrilled to have evidence like that to further damage Obama's credibility.

Your assertion is only mildly interesting because the factual basis for it appears to be lacking.

As outlined above, while most OECD countries, e.g., the US, have shown declining consumption, many non-OECD countries, e.g., China, have shown increasing consumption. If memory serves, the last EIA estimate that I saw put estimated total global demand in 2009 down only about 2% from 2008.

Something like that fits pretty well with my results and also with reports of offshore storage amounts and builds onshore. Note not with the extremes that are claimed but we did have a nice mini flood of crude. Not exactly a glut but at least some respite. Of course there is a reason for the six month number.
Check your email but no doubt about it that 2% estimate is good and there is a valid reason its good. And if its a sharp drop consistent with how the financial crisis unfolded we do build a one time mini glut in the range of 234-90 million barrels. Even my approach gives this as very probable in fact at least 90 million is practically certain much over 200 gets questionable the highest I could see is something in the 200-300 million barrel range globally. I'd have to guess the US grabbed a good bit of this so maybe 100 million barrels with 50 onshore and 50 off ? Something like that has a very high probability of happening. Given the way the oil markets worked and the financial situation as far as prices go I'd say only 30-50 million barrels where actually needed to collapse prices. When the sky is falling it does not take much and I think we had more than enough. The way the price rose turned out to be consistent with the same reason I pick six months.

And it was probably a one shot deal not to happen again esp if you include export land. In any case all of it fits pretty dang well I'm pleased but like I said it was a one shot deal.

Very short term i.e late 2008-2009 price where controlled by two things a short term oil glut and people bailing on oil futures trying to raise cash. All kinds of liquid assets crashes ummm like maybe the stock market. Last time I looked there was no shortage of stocks for sale. Mixing supply and demand with a liquidity crises is simply ludicrous.

Plenty of real producers and consumers of oil where blown out many Airlines etc.
On the producer side those that hedge out right made out like bandits those that did not got killed. We of course will probably never know for sure who was on the right side of the trade except its notable that Mexico was.

As far as US demand goes I'll have to say and you will see later I can't get anything but global numbers no way can I get individual country numbers but oil is a global commodity looking at questionable numbers from one country is simply not sufficient to talk about oil. And globally it was a very sharp monetary crisis not sudden changes in demand. If anything WT export land should show that plenty of people are willing and able to buy oil if the US consumer is not up to the task. Except of course right in the middle of the potential end of the world as we know it. But thats back to the sharp financial crisis not any sort of generic supply demand argument.

As far as this goes.

Therefore, to bolster your position, you must demonstrate evidence of government manipulation of the price structure in an ongoing and constant attempt to set prices.

Nov 11 - The decision to migrate the Saudi crude oil price formulas from Platts' WTI benchmark to Argus' Americas Sour crude Index (ASCI) was a logical step that has been well documented in the press.

While ESAI agrees that this development will have little short term impact on the WTI benchmark, there will undoubtedly be wider implications for crude oil pricing in the long term. In a note to clients last week, ESAI laid out the sequence of events that might eventually lessen the impact of paper trade on oil pricing.

No, memmel, C happened. When OPEC cut production to force the price back up last year, they raised the price of their least profitable grades, sour crude oil, to reduce demand putting the economic stress on the sour crude refineries.

So I'm supposed to accept as fact that the Saudi's want to price their light sweet crude using a heavy sour benchmark ok ...

There may be millions of reasons for Oklahomans to be concerned about the glut of crude oil being stored in Cushing.

Some in the state’s oil and natural gas industry insist an influx of oil from Canada has affected the market at Cushing, where the New York Mercantile Exchange sets its prices.

Enid oilman Harold Hamm said he is concerned that Cushing’s vast oil storage could decimate the market,...

The EIA site is down so I can't get a graph.

Now of course since you made this statement in print.

Therefore, to bolster your position, you must demonstrate evidence of government manipulation of the price structure in an ongoing and constant attempt to set prices. I have seen no evidence of this at all in the oil market. If you lack such evidence, your assertion is dead on arrival and null before you even submit the paper to Nate.

I must bow to your superior skills at making statements and accept all the obvious truths they almost certainly explain everything.

Or not.

Just because you decided to say this does not make it true in fact given your arguments your so far off its not even funny. One things for certain 2008 and 2009 have been fascinating I'm still working over everything that went down its amazing. I wonder if we will ever know the true chain of events from the outside.

Not that I can't figure out what happened its just why ? Why pull the plug when it happened. Nothing I have suggests that it was the big one.

Right now my best guess is that it was not meant to go down like it did and the original plan was a soft landing that blew up in spades but did have a oil angle from the start. If you look back into 2008 then all kinds of interesting info pops out.

This past Tuesday, when Bear Stearns(BSC Quote) was trading around $65 a share, there was huge put volume in the March $30 strike.

Over 55,000 contracts traded that day at an average price of 15 cents a contract. This is an extremely unusual trade in terms of the number of contracts and how far out-of-the money those options were at the time. This begs the question of why someone would execute such a transaction.

I won't even go into how Lehman and Bear Stearns where involved in energy like all the investment banks they where in it up to their necks.

I'm not going to lay out some conspiracy theory simply because way to much ammunition is available to develop any theory you wish.

I will say that it makes sense that originally the goal was to cool the system down and bring oil prices down that makes sense even as and outsider. And it makes sense given how the unfolded that things got out of had but they certainly where capitalized on. I think the original plan was to get some slack back into the system and it was executed taking advantage of opportunities as they arose.
Needless to say some of the moves from the period are now under scrutiny and found increasingly questionable.

But I'm not even going to try to use published changes in US demand to even attempt to sort out this mess.

I can figure out what eventually happened thats fairly easy. But its better to treat March 2008 to Jan 09 as a sort of black box that resulted in a significant amount of crude floating around and the world not coming to a end along with a sharp short financially induced demand drop in the middle and some final demand level slightly lower than when we entered.

Going any deeper is steeping into a quagmire of possibilities.
I won't even try to make pompous statements about the middle I can't its way to complex and way to much was done off the cuff.

And last but not least as far as I can tell using secondary data such as VMT US consumption hase been falling steadily for some time regardless of its actual value VMT has not followed its historical trend since 2004.

Of course its been rising lately even as oil prices increases but lets not stop simple things like facts collected from a agency reasonably isolated from oil detracting from our arguments.

In fact you can't even see the great crash on the VMT chart.

Now with this said I don't expect VMT to continue to rise much farther if oil prices continue to increase but I'm on record as stating numerous times that I expect it to flatten out steadily at least until we cross to say 200 a barrel or so. Then perhaps it might trend downwards but at a slower rate than before.

But thats a variable I watch more then predict. Given the US population significant structural changes in transportation are probably required to turn VMT downward again and thats going to be hard.

Regardless its a complex situation with lots and lots of things going on but at least up till recently offshore crude and the stuffing of Cushing have both worked to control oil prices. Even as many claim victory and that 75 is a good price for oil I claim that the ability to control prices is crumbling and based on a series of unfortunate or fortunate events depending on which side of the game you where on.

So last but not least in this long long post and the reason why I jumped in is Gail's post is actually a signal that the ability to control prices that I'm claiming is actually ending now. Of course as proof I can simply offer lets see what happens over the next several months same thing I say to everyone. Lets watch events unfold.

And its all I can say since we are in my opinion on the verge of a new and more serious part of the game of oil and money. And oil looks like it will win.
I hope you did well in the frying pan as its getting ever closer to fire time.

What data, memmel? You've not shown anything regarding oil prices other than the Saudi crude decision, which YOU simply throw out because you refuse to believe it. And on the basis of such flimsy evidence, we're supposed to accept your assertion that this is all due to price controls?

You have zero factual basis on which to stand. And further you are making the controversial statement here thus you are the one that needs to defend it with a rather deep and complete array of facts, not just your personal assertions.

An assertion is not equal to a fact, memmel, except for economists and politicians. Are you an economist or a politician?

Now clearly, from the above global data, there was a drop in global oil demand from 85.74mbpd in the first quarter of 2008 (early days of the recession) to 83.64mbpd in the second quarter of 2009 (a span of 6 quarters). Further, the data shows steady decline in production (which is demand) while we know that prices fell at the same time. If production was falling and demand had stayed high, prices would have stayed high and gone higher. But they did not.

Right there in the EIA data is a 2mbpd drop in global demand. In other words, the US drop of 2mbd was most of the world's drop over the same period. Other parts of the world did not drop but they did not go up either. Ergo demand fell or was flat.

Your assertion is that prices fell due to price controls, for which there is you have presented no evidence whatsoever. What I am asking you to provide, memmel, is evidence, not speculation. Now it's time to either put some facts on your hypothesis or simply withdraw it as unsupported by the available data.

You have absolutely no way to prove these numbers are true.
They are not facts any more than US unemployment numbers are facts.

Your assertion is that prices fell due to price controls, for which there is you have presented no evidence whatsoever. What I am asking you to provide, memmel, is evidence, not speculation. Now it's time to either put some facts on your hypothesis or simply withdraw it as unsupported by the available data.

No Greyzone its not time sorry. Just because your demanding something won't make it happen. I did however send a rough draft off to Nate and WT. Its still a very crappy poorly written paper but I will assure you they have it and the approach is obvious despite my poor writing. When its ready to publish it will be published if they don't think its worthy then I'll put it on a blog somewhere.
It was enough to convince me but peer review takes time.

Is it time for me to show it to you just because your demanding it ?

Before you spout facts from unreliable source you need to fact check the data.
I've spent years pondering the data issue before even considering what the facts are without good data you can't tell. Like Simmons I believe the lack of data is a critical problem. Having figured out a way around it I understand why the truth was hidden not that I agree with the decision but I can readily see why it was made.

You have no idea what the truth is at least I've done the work to get a decent idea. One has to at least have a bit of doubt to be a good scientist given the sources for most of our "facts" on oil I'm a bit surprised your so certain you can use them as proof.

Obviously I've found proof sufficient for me to be very very confident that the official numbers are pure fiction.

Consider carefully your arguments. Plenty of evidence exists which makes it reasonable to doubt the EIA numbers we even have a whistleblower floating around these days. Think about it. We have someone inside the EIA claiming the numbers are wrong and further more claiming its US pressure that behind it.
I'm confident enough that I've developed a smoking gun of sufficient proof to say as and outsider that I can confidently say I agree with with the the hint of serious issues with EIA numbers.

Are you absolutely sure you can use EIA numbers to discount what I'm trying to say ?

One last thing knowing the truth has not exactly been joyful for me. It turns out it sucks to understand with clarity how and why things have happened they way they have. Surprisingly this quote pretty much sums up the situation.

Upton Sinclair:
It is difficult to get a man to understand something when his job depends on not understanding it.

Thats all that got us into this mess. A series of decisions to ignore the truth until it grew to the point that telling the truth became impossible.

What a stupid reason to destroy a civilization. And thats what bugs me the most not the outcome but the trite or banal reason we are going down in flames.

Moral hazard is a special case of information asymmetry, a situation in which one party in a transaction has more information than another. The party that is insulated from risk generally has more information about its actions and intentions than the party paying for the negative consequences of the risk. More broadly, moral hazard occurs when the party with more information about its actions or intentions has a tendency or incentive to behave inappropriately from the perspective of the party with less information.

I'd have to think that many people are becoming suspicious that the world might have just fallen into a moral hazard of epic proportions. If you simply look around and consider that it might of happened plenty of evidence exists to suggest it has.

Consider a bit more of the definition.

Moral hazard also arises in a principal-agent problem, where one party, called an agent, acts on behalf of another party, called the principal. The agent usually has more information about his or her actions or intentions than the principal does, because the principal usually cannot completely monitor the agent. The agent may have an incentive to act inappropriately (from the viewpoint of the principal) if the interests of the agent and the principal are not aligned.

One limitation with the application of principal–agent theory is that the agent can also try to incentivize the principal. This is sometimes referred to as the double-sided principal–agent problem or sometimes more commonly as corruption.

No grand conspiracy no evil designs just the good ole boys keeping things going and kicking the can down the road a bit fudging the numbers just a bit more each step of the way until they where so friggin deep in a hole they had no way out.

Thats what happens when you take the path of moral hazard surprisingly it seems the results of this path are seldom mentioned. No readily available economic paper seems to cover it.

However Moral Hazard on a global scale by its intrinsic nature also creates systematic risk effectively by definition. To some degree Taleb's black swans are really the response of a system deep in a moral hazard/systematic risk trap.

In my opinion there is no way out of the trap once it passes its early stages.
It always results in collapse. I suspect the point of no return is very early in the game. What obviously happened of course is that a simple mistake was made.

The assumption was made that rising prices would trigger greater oil production and the slow down was temporary. The problem of course and surprisingly this is not taught in basic Economics as far as I can tell is that this assumption can be a Moral Hazard !

If the underlying cause is actually depletion of a key resource leading to declining production then the simple rules of economics become vicious moral hazards. Eventually of course the real situation becomes clear but at that point the false assumption that higher prices would spur production have often been made to the point that even as you realize you have really created a huge moral hazard its literally to late to change course.

I find it interesting that a blind belief in simple market forces that ignored the concept of Moral Hazard resulted in our downfall. For all intents and purposes it was a religious belief in the superiority of our market systems which has ensured our destruction. Worse of course our leaders believe that they need only use their immense powers to intervene in various markets from housing and yes to oil and they can make everything right again. They are so blinded they literally don't have a clue that they have really simply increase the moral hazard and systematic risk level exponentially.

Of course they are still doing everything they can to hide the truth since its too late now to do anything and the original problem is even more dire.

Just to finish obviously I've found sufficient evidence to realize its way way to late in the game to escape the chance to get out was closed off long ago.

So GreyZone you can write your self assured posts and yes I will publish my work but all it does is at least allow those with open minds to understand why we went down. I don't really care how inflammatory your want to be it does not matter the game is up its over. Were done. Nothing your opinion or even mine or sadly at this late stage the truth can do to change the outcome. Its like looking up just in time to see if your being run over by a bus or garbage truck nice to know what took you out for a few fleeting moments but not all that useful.

We've been generally accepting the EIA data here for years, memmel. If you are going to postulate that data is bad, where is the proof?

Are you building an entire paper on unprovable assumptions?

No one can possibly take your position seriously unless you can provide something other than your own beliefs about what happened.

You are making a really incredible assertion that also implies a single world government working together to effect this change and working together to twist all published data everywhere into lies. This doesn't even come close to comparing with the BLS data silliness on unemployment because the BLS actually publishes its skewed methodology. Where's your methodology, memmel?

You can take cheap shots at me all you want but that does not change the fact that you have failed to show any real data whatsoever for this incredible claim you are making. All that I am asking is to see the data. And if Nate publishes your paper without any data whatsoever to back it up, then my opinion of TOD will be seriously lowered.

You've got an incredible claim. Ok, fine. Prove it. I'm more than willing to listen if you can provide actual proof. That's all I am asking for, is proof. Yet so far all you've done is take cheap shots at me and make snide remarks. Not terribly convincing, memmel.

P.S. The whistleblower is in the IEA not the EIA, memmel. Get your agencies straight. And the whistleblower never contested production numbers. He contested reserve numbers, something completely different. I suggest you review your hypothesis in light of that information.

First of all there were two whistle blowers not one from the IEA one of whom is retired & one still currently at the organization. If they had been from the EIA then it would hardly be news that they were under American influence. From the article:

A second senior IEA source, who has now left but was also unwilling to give his name, said a key rule at the organization was that it was "imperative not to anger the Americans" but the fact was that there was not as much oil in the world as had been admitted. "We have [already] entered the 'peak oil' zone. I think that the situation is really bad," he added.

Matt Simmons amongst many others have questioned key published data for many years. Whilst controversial I think there is more than enough evidence to cast doubt on the official figures most people have clung to them for want of any real alternative.
The incentive for the powers that be to be creative with the data are pretty self evident & I doubt that we need a vast world wide conspiracy for it to be put into practice.

The other data I use is from verifiable trusted public sources but for that you just have to wait.

Your the one thats attacking me I guess because you don't like my style. Or what ever your not the only one on this board I assure you.

Even in hard core science your free to pick and choose who you submit and initial draft of a controversial paper to. Its perfectly acceptable to initially allow people you trust and admire to do the first round of review. And of course for me simply ensuring my sentences make sense is a hurdle.

I will suggest that your approach to the issue makes it difficult to consider you as a candidate for and initial reviewer.

Next nailing me on IEA vs EIA given I have dyslexia is a bit of a cheap shot. I have to imagine I flip them routinely in fact I think people have corrected this mistake for me a few times. Heck its and easy typo for anyone to make.

And last but not least as far as I know all peak oil theories include the assumption that production will peak at some percentage of total reserves.
I'm a bit surprised your questioning the simple leap I made that if reserves are in question perhaps production is also and issue ? Given peak oil theory if reserve numbers are bogus then production may also be bogus.
Perhaps this basic connection is not obvious I honestly did not even think about it not being self evident. But given peak oil theory if reserve numbers are questionable then they whole house of cards behind them comes tumbling down.
Certainly corrected reserve estimates for OPEC nations have been used extensively to try and guess peak production many times on the oildrum. The issues there are blatant less blatant changes to reserves are possible but difficult to detect. But any significant change to reserve numbers has and impact on production and certainly this impact could extend into the past it all depends.

I've always done my best to tell the truth as I see it data is a critical problem and and important one perhaps my style is questionable but heck when you think the real problem is politically tainted data then what approach can you take ?

As and example CERA's reports and the USGS report and of course OPEC reserve claims are simply unbelievable. Anyone thats done any research has to question them. Yet the oil industry says nothing to counteract these bogus reports ?
Where the fallacies end is of course and open question but the fact the oil industry is quite happy to allow blatantly incorrect data to be published without raising issues leaves the extent of the error both unknown and potentially large.
All kinds of logic and game theory flags are raised simply from this pattern alone. Skepticism is warranted. And thats been a problem I've mulled over for years how to know where the lies end and the truth starts ?
Not that some obvious whoppers are not repeated verbatim with no attempt to contradict them.

You have to show how you split the wheat from the chaff if you will why EIA,IEA, API pick your acronym is reliable. I think some stunning models have been presented on the oildrum however verification of the data is a particularly knarly problem. Data transparency is critical since this is probably not forthcoming a very interesting hard problem presents itself how to determine the truth. And its been fun mulling it over on the oildrum. I'm not done with it but obviously I think I've made significant progress worthy of a post. You may have noticed I've never ever posted before. I did not think my conjectures warranted a post to many loose ends regardless of how compelling the ideas are to date the smoking gun always seemed impossible to find. Since its a problem of fraud catching the crook without transparent data is non-trivial. We don't have the other set of books allowing us to crack the case.

Whats a bit funny given my stance is how your using "data" to attack my position which is that the "data" your claiming is true might have serious problems.

Hopefully you can see the logical error in your attack. If your logic is faulty then no real reason to respond to your claims. To play this game you have to develop your audit system and explain how it works and why it proves your thesis that the data is correct. As far as I know no other approach works for fact checking data. If your proof rests on the fact the source has any acronym behind its name well my approach also uses data from acronym'd public agencies and companies so perhaps we are down to who uses the most acronyms :)

I finally think I have something worthy of posting so I'll post if its accepted.

Of course they are lying to us, because they always have. Its what they do.

As for the Saudis, the first thing I learned in the Persian Gulf is, whether you're buying gold or pearls or oil, they always lie. That's how they do business. If you believe them, its your bad. They seem duty-bound to deceive.

Enid oilman Harold Hamm said he is concerned that Cushing’s vast oil storage could decimate the market,...

The EIA states that as of 11/27/2009, the crude oil stocks in Cushing, OK, are 30.9 Mb, about 9% of the US stocks of 339.9 Mb, hardly vast. Cushing could decimate the market by selling 1 Mb/d for 30 days thereby driving the price and their profits down. Then Cushing could launch a buying frenzy driving the price back up as they refill their storage and empty their bank accounts. Despite the claims of Saudi Arabia, speculators are not manipulating the market. OPEC is controlling the price by acting as a swing producer.

Written by Memmel:
So I'm supposed to accept as fact that the Saudi's want to price their light sweet crude using a heavy sour benchmark ok ...

Saudi Arabia raised the price of their sour crude oil nearly a year before they switched from the WTI benchmark to the Americas Sour Crude Index (ASCI). Since ASCI is still tied to WTI I do not understand what they really hope to gain from the switch. Maybe it is as the Reuters' article suggests in the third from the last paragraph: to deflect blame when the WTI price starts rising. Or perhaps, when the price of crude oil begins to rise again, if the marginal barrel is sour, then perhaps they would be able to control the price more easily. That kind of power certainly would make them want to set the price of their light sweet crude with an offset from a sour benchmark. Remember, Saudi Arabia wants to keep the price around $70 / barrel to avoid another oil price shock that would damage demand causing the price to undershoot again.

My point was fairly general the Saudi's do all kinds of things and say all kinds of things. Consistency and creditability is not their strong suite. In general what you never seem to see out of them is gobs of cheap oil. OPEC in general for that matter.

As and example almost invariably when they increase allotments to one region they tend to lower them in another. And of course even in a given region we only get statements from a few of their customers confirming a increase.

I actually have no idea for example which refineries in the US purchase Saudi crude on a routine basis or on the spot market much less the rest of the world.

Its just I don't know how to parse it if you will. One has to imagine for example that the oil came via VLCC or some fairly large crude carrier the per company numbers are not mapped back to the actual shipment as far as I can tell.

Ongoing analysis of imports data to the Energy Information Administration reveals that some imports are not correctly reported on Form EIA-814 "Monthly Imports Report". Contact with the companies provides sufficient information for EIA to include these imports in the data even though they have not provided complete reports on Form EIA-814. Estimates are included in aggregate data, but the estimates are not included in the file of Company-Level Imports. Therefore, summation of volumes for PAD Districts 1-5 from the Company-Level Imports will not equal aggregate import totals.

Thus to a large extent useless info.

Unless you can figure out a way to confirm the variable Saudi claims then your forced to try and see if you can fit other info to fit their story. I've found no consistent way to fit their spin. Perhaps you can stitch together something that has a minimum number of holes at any given point in time but there is no consistent overall pattern outside they seem to never really deliver physical crude to match their claims. Personally I think the Saudis are like everyone else i.e no magic powers no vast amount of spare capacity and esp no real control.

Where the world is as far as crude production goes is a different issue but my assumption that Saudi Arabia is really nothing special just one of the top tier oil producers and in a similar situation as the rest does a good job of fitting all the data. KISS or Occam's razor seems to work.

Think about the US we are still the 500 pound gorilla on the world stage but we are also obviously past our prime. My opinion of Saudi Arabia is similar they are still a top exporter no question but unless they show consistent actions to cover their claim I'll stick with my fairly reasonable assumption that like the US a lot of the talk is just talk these days. Both countries are blowing a fair amount of smoke.

Gail and memmel: I very much appreciate your observations and discussion of the refinery issue, a subject that will grow all the more complicated as it appears there will be a strong push by the US federal and state governments to increase the % of ethanol in gasoline next year.

News Journal, The (Wilmington, DE)
December 5, 2009
Section: BUSINESS

Valero may sell New Jersey refinery

December 5, 2009 Valero Energy Corp., is looking to buy additional ethanol plants because they provide a good supplement to Valero's business of producing gasoline, diesel and other fuels, Chief Executive Officer Bill Klesse said.

The company, which bought ethanol plants from bankrupt producer VeraSun Energy Corp. earlier this year, will consider plants that are available at below their replacement cost, Klesse said.

Because of pressure on gasoline and diesel margins, the company is considering selling its refinery in Paulsboro, N.J., Klesse said.

While a potential buyer did look at the plant previously, those discussions are no longer active, Klesse said.

Valero has permanently closed its Delaware City refinery after considering a sale.

While closing is an option for the Paulsboro plant, Klesse said he doesn't expect to close any refineries in the next year.

We will have to see how the proposal to raise the ethanol limit to 15% (from the current 10%) works out. I understand the EPA asked for more time, and may OK a two tier approach, with a higher limit for only model years 2001 and higher vehicles.

I'm completely not shocked to see the US pushing ethanol hard.
In fact I'd not be surprised to see the US drop restrictions preventing import of Brazilian sugar or ethanol in the fairly near future.

Increasing the ethanol precentage makes a lot of sense.

Perhaps a bit later we see a cash for clunkers that cant run E85 program started.

EV's should get a huge push soon I'd think. In fact the only reason I can think that we have not made a tremendous push to date is political infighting between the ethanol supporters and EV supporters. And probably even the NG guys.

Also of course and this should not be discounted all the way through this conversion we are highly dependent on oil so if we did it too early oil producers could cripple us unless they felt they would get high prices even as we converted.

I think thats a really really important issue that people don't address oil producers are not going to set around and sell us cheap oil to help us convert to EV's and ethanol powered cars. They are not that stupid.

I think a big alternative to oil push is coming and this time the oil producers won't stand in the way.

But of course they are going to try and sell all these glitzy new EV's and ethanol powered cars on credit to people who are flat ass broke so ...

If I still lived in Atlanta, I would be driving a diesel car based on this information.

The current refined products demand slump was to be expected. The same thing happened following the 1970's-80's price spike. We also had a round of refinery closings, although from a much lower capacity utilization rate.

In the 1970's-80's there was a long term trend of increased fuel efficiency. This time the mileage improvement will be even greater because we have hybrid technology, with many new models coming to market next year and beyond. And if we are in fact in a long depression, domestic demand will continue to be destroyed.

I do not expect any new refined products pipelines to be built. Corrosion will take its toll and there will probably be repair outages that cause disruptions; however, as long as demand keeps falling, the capacity of the pipelines will be increasingly adequate, especially if there is enough interconnection.

I suppose the closing of the East Coast refineries is consistent with the drop in petroleum usage from 20.5 mbd to around 18.5 mbd. Offsetting these closures to some degree, BP has been working to expand its refinery in Northeast Indiana (along Lake Michigan)so as to handle crude from the tar sands of Canada which is a growing source of supply. I would guess that closing the Aruba refinery has something to do with the falling amount of Venezuelan oil available -- Chavez threw out the big oil companies and stiffed the oil service providers within the last couple years, so production there is probably declining at a rapid rate. (There's reportedly substantial numbers of ex-pat Venezuelan oil workers in Alberta working in the tar sands.) Presumably Chavez is trying to coax the Chinese into investing in the Venezuelan oil industry -- we'll see how successful he is at that.

From 22 Sept
At the beginning of this month, China and Venezuela signed an oil exploration agreement worth USD 16 billion, and the refinery, close to Venezuela, becomes important in terms of strategic position, according to the Prime Minister. Currently, the Aruban government and the Chinese oil giant are still in talks, he added.

From 2 Nov
The Refinery at San Nicolas will become partially operational again. In this, owner and operator Valero wants the potential buyer Petro China to observe the refinery's operation and its status. The starting up of facilities will take approximately three weeks.

As far as Chavez dealing with China that's old news. China has been investing in Vz for more then 13 years. Earlier this year Vz signed another long-term trade with China: China will build 4 heavy crude specific tankers to haul to 3 special built heavy crude refineries in China. Just reading between the lines it sounds like Valero was forced to shut down its Aruba plant for lack of Vz crude. And who jumps up for the fire sale: China. And who is getting deals on Vz crude: China. And who will be the market for those Aruban products: the US. Well, at least until the Chinese has a greater need for those products back in China. This is a classic Chinese setup. Unlike US companies, Chinese companies are not forbidden to use collusion with foreign govt’s and are actually are encouraged and financed by their gov’t in those efforts. The combination of a communist controlled gov’t combined with solid cut throat free market techniques seems unbeatable IMHO.

Very valid post, Blue. I have often wondered when the Chinese might begin puchasing our farmland and Agri-Biz (through proxy perhaps). They certainly have the dollars and leverage to do it. It's been happening in other industries.

I find I am wondering, why are our safety factors (as a society) breaking down in the manner? Obviously refining margins have been poor, but I would think with looming local/regional supply issues, that prices and refining margins would see a big spike. So what is different at this point in time? Have politicians appetite for going after "price gougers" made it impossible for anyone to enjoy decent margins -even when shortages develop? Reduced demand? But that should make the capacity issues easier. Has our appetite for free-market and no government regulations translated into former watchdogs of things like overall system stability closing up shop? I can imagine they may perhaps have required a certain amount of redundancy so the system can handle the unexpected, but with regulation going out of favor have they gone out of fashion? And then the refiners and p/l companies only need to model their own profit/loss -the heck with the economic damages a shortage could entail, that is an externality borne by someone else. Or is it something else?

I think the cutback in credit availability is a big part of what has been happening in the past year, and a big part going forward. It keeps gasoline prices low and margins low.

The folks who are trying to watch over everything are now so short of funds themselves (except borrowed funds) that they can't do much. And free market is still viewed as being capable of solving everything.

Gail money and oil are so tied together esp with my latest work that pulling them apart is like assuming the Heisenberg uncertainty principle is invalid in quantum mechanics. Money is oil and oil is money there is no difference.

My recent work and yes I know its unpublished suggest they are equal and always have been. For now at least consider the debt outstanding is for all intents and purposes related this way to oil and population.

Debt = population/oil production

If the numerator grows and the denominator declines then you get the classic thing you see on maps in the mall.
You are Here :)

Seriously though I think it stand on its own independent of how I derived it.

And if you assume its true you actually can do a decent job of replicating my results so ..

And hopefully you can see how it works and seems to make a lot of sense.
And as I said in my opinion it stands on its own without need for supporting evidence although that helps explain to some extent why its true it not needed.

Whats interesting is how coal and NG don't really contribute you would think they would be just as bit but as far as I can tell they are generally related to manufacturing and the money supply far exceeds the amount of manufactured goods so actual goods don't play a large role. This of course does not include houses bought at inflated prices with long term debt their prices vastly exceed the energy costs for construction and are in sucked into this twilight zone of the debt world. Plus a lot of the materials are individually cheap and made with low cost energy sources. Its everything else outside of the special case of things purchased with debt that spans decades. In fact the fact we can build craploads of buildings and everything else shows that cheap energy supplies i.e coal and NG are not yet at least a critical factor in our economic system. Otherwise we would not be wasting the energy building uneeded buildings ?
Total energy i.e the sum has grown of oil ng and coal yet debt has exploded obviously the total is not enough regardless that population has grown.

Anyway I myself have not been "enlightened" long so I'm still musing over all the cool economic factors I've only had it figured out for a few weeks so I'm still thinking about all the ramifications.

No offense, but you would really have to provide supporting evidence. I think your postulate above is EXTREMELY controversial, but I may be completely misunderstanding it.

It is a fascinating area of thought as to how debt is related to oil, energy, technology and information, and "real" wealth at all.

One wonders why nations having no home energy but very large home populations compared to the physical size of their nations have faired very well in the last half century...Germany, Japan, Switzerland, Denmark come to mind. Is debt the key? If that were true it should be easily demonstrated that these countries are massively more in debt per person than other nations with less population and more home energy...does this in fact hold true?

China and India are now the fascinating cases, so called "nations of the future", with massive home populations but relatively low oil production prospects per person. If your postulate holds, they are certainly not "nations of the future", and should soon begin to sink under a wave of debt as the standard of living of their home population attempts to rise. Are we to assume this will be the case in the upcoming years?

I recently heard a lecture given to Chinese businessmen by way of my work, and the consultant speaking opened with these words..."do you know that the biggest exporter in the world on a per capita basis is Germany...? How do we explain that?"

Indeed, how do we explain a nation which must import every drop of it's oil, every foot of it's natural gas, and most of it's raw minerals being one of the greatest exporters of high tech, value added products in history? Is there some other factor that must explain how nations such as Germany and Japan can afford to import everything, process it, and still deliver cost competitive and well designed items for sale, thus pushing the debt problem to thier customers instead of carrying it themselves?

Yes there is another factor, but of course it is astoundingly unpopular on this board to mention it. The Oil Drum is becoming one of the few places in the world to reject the power of this factor almost without discussion. It is such a bias as to be almost astounding, a cultural bias that is impossible to explain. The factor is INFORMATION leading to advanced TECHNOLOGY.

The presentation seems to be built on two premises: (a)technology simply will not work and can offer little or nothing and (b)if you don't accept this, it simply means you do not know enough (if you know anything). I can assure you that a presentation built on these two premises will fail whether or not it is correct (it is basically a slap in the face to any thinking person), and history gives us every reason to believe it is simply an incorrect set of assumptions anyway.

The recent astonishment at the drop of oil consumption in the OECD nations is an example of how the power of information and technology are being greatly underrated. Simply using the digital technology we have to refine our logistics and transportation arrangements alone could probably remove a third of OECD oil consumption without a single new technological breakthrough. Even more astounding reductions are possible with no loss of comfort in residential and electric power consumption.

We are on the front of a wave of technological change that will make the 20th century look like a dark age. As this technology reaches the point of "confluence" (i.e., one technology begins to feed advances in other technologies) the potential efficiency will speed up, disrupting everything we thought we knew about energy consumption, energy production, investment, finance and debt.

The point of my someone wordy response is actually much simpler than it may seem: Just as Alvin Toffler postulated back in the 1970's, INFORMATION, not oil, not even money, will be the deciding factor in how we survive and prosper in the future. Correct use of information will overwhelm debt by orders of magnitude, IF, and this is the big if, we choose to use it.

Quit thinking about nations thats where your making a mistake national borders are meaningless and have been for sometime. We live in a empire. Pax Americana.

Rome was well fed on the grain from North Africa. The flow of energy and how its distributed is determined fundamentally by military might and next by the commerce web. And last but not least we are still in the last echo's of WWII today.

Using archaic national borders to argue against a global equation is simply senseless. Not even wrong it just makes no sense.

On top of my equation is of course how the oil pie is distributed amongst the population so you can overlay it with a huge pyramid of per capita oil allotments.

Even this does not really capture the truth because as you leave the wealthiest countries per capita measurements fail to capture the tremendous disparity in distribution i.e its a number of pyramids with a vast throng at the bottom eking out a living.

Globalization connects the teeming masses to markets they will work for anything that has some notational value even worthless paper script.

Now back to Germany and Japan in particular the losers of WWII one can compare them with Italy which was also in the Axis but suffered far less destruction from the war. What we find is that the rebuilding of both following WWII gave them substantial industrial production that had and effect for decades following the war.

Thus although the flow of credit, goods, and oil is global the details tend to be rooted foremost in the post WWII changes primarily in rebuilding an from there into the related international conglomerates and banks that where created on top of this post war wave of internationalization to connect rising production with markets. Thus a lot of the detailed structure of how things work today is a direct result of the war.

On top of this you have two other closely related wars that have come to and end in the last decades the first was and end of the Soviet Union and the second was and end of the isolation of China. Overall its the change of the world from one with three loosely connected parallel economies to a single one. Even India should be included to a large extent as it also only really entered the growing globalization sphere following the demise of the Soviet Union.

Universally the reward for playing the fiat money game has been a large influx of credit and sharp increase in concentration of wealth at the top for nations willing and able to play.

What people turn a blind eye to is the disparity pyramids thus created as wealth concentrated almost universally the lower classes where increasingly impoverished.

Thus the factor that comes out as your look at the partitioning of this equation

Debt = population/oil

Is the huge and swelling class of people at the bottom that get literally drops of oil in many cases less than 1 barrel a year.

Its not even realistic to call this potential demand its hunger to have something besides a squalid third world existence. The lowest classes are starved of access to the flow of debt and oil and related goods while the top discards them in huge rubish piles. Its a potlatch of global proportions broadcast digitally to the world as they look on with envy and desire.

We call it the American Dream but its probably best described as the American taunt or cruel joke played on billions of people.

This starvation is what really drives the world economy its the desperation that ensures our debt is treated as money as only our debt and the debt of other top nations is allowed to be used to purchase our goods.

The value of the fiat currencies thus thrives off this gradient of disparity.

That`s about right I think. I was talking to someone from Vietnam the other day. He said that China had built 30 dams on the Mekong River (that is, upstream from Vietnam) so that people in Vietnam who used to use that river for resources like fish, drinking water, etc. now can`t do that so much anymore. (There is also a lot of pollution being dumped into the river). So the Vietnamese who were O.K. before now have to go to the city and look for work because their river, which was their wealth, has been in effect stolen fom them. By us, the creatures in the wealthy countries.

We just got the Chinese to go along with the program, probably by exerting the same pressure....letting some Chinese get rich at the expense of millions of poor and them watching the poor ones tumble into starvation as their land and water turned green and pink and orange.

It is a game that does have an end though. The guy over at ShadowStats is saying "total economic and financial collapse" in 5 years. And a dollar crisis next year.

The exportation of waste gradually becomes more and more expensive and less and less worthwhile.

Vietnam has one car per hundred people. They have a lot of motorbikes. They haven`t changed their country as much as China and I don`t think they will have time to do so because it`s so late in the game.

The problem is not so much that but this oil demand is highly inelastic i.e Vietnam is a oil producer and its citizens needs for the motor bikes simply don't have good substitutes except to move back to bicycles. I suspect some Westerner is going to suggest electric bikes and yes they have some of those but if you know anything about third world countries then you know thats not and option.

Now moving on other countries in the region have similar demographics most a lot less oil.

What do you thinks going to happen when the ones without oil are forced to give up their motor bikes while the Vietnamese go happily motoring along ?

If you think Americans giving up their cars is a issue I think you underestimate the importance of the little motor bikes in the third world.

This gets into export land to some extent but you can see how the intrinsic demand for third world countries is just as inelastic for different reasons.

This is not WT export land but I hope it shows you the nature of third world demand in my opinion its very inelastic and the motorbike->car transition is under full swing. And its similar pretty much throughout the third world.
Attempts to cut consumption of oil in these countries is a political bomb.

Wow I wonder if this decline rate has a relation to the elasticity of internal demand in exporting nations. If there is any elasticity in demand it seems to occur only long after a former exporter has become a net importer. Before then curbing internal demand seems politically impossible for the most part. Perhaps on exception is Iran.

Using the most conservative estimate it took 30 years after the US became a net importer before there was a significant change in the consumption slope and a top forming.

Why this happened is not something I want to debate just that if you look the time between when a country is a net importer for many its been effectively forever as they don't produce oil and when the rate of consumption increases flattens seems to be a very long time.

Perhaps with your import/export data you also have information on how various countries long term consumption patterns have changed. With what I know it seems that consumption is probably more easily linked with demographics in particular the aging baby boomer population falling only as the population ages significantly. The transition from importer/export has little effect and indeed as far as I can tell countries that have always been importers only slow when the demographics shift to and aged population. If true given the demographics of third world countries vs first world its decades before third world demand would begin to flatten much less decline. Having oil demand fall primarily because people are retiring is not exactly a good thing given the remaining population is responsible for funding their retirement. Not exactly something to be excited about.
Export/Import land and demographics and changes in oil consumption make for some interesting ideas. Obviously for the most part I don't see that your consumption assumptions are wrong given your time frame for most countries to remain net exporters peak demand using demographics is way way past peak exports.

You make some fascinating points, and is a shame we could not have a forum on these issues somewhere so that it could be continued past the point of this soon to be dead string of replies.

First, your point of using nations as example cases has built into it some huge weaknesses, and I agree with you that we are probably going past the point where it will even marginally useful. The problem is that for now, it is all we have. There are extremely accurate measurements of the GDP, debt, imports and exports and per capita income of individual nations. While such statistics exist for the world overall, they are, and this is exactly to your point, greatly slanted by the huge disparity in all the above catagories from nation to nation and from region to region.

But we are still faced with what is at least noticable disparity between nations in the same region, and who should in theory have the same access to capital, debt and the international money system. Does this disparity between these nations who in many ways are somewhat equal (no two nations are never equal in all ways)and is it access to oil (or even energy) or access to debt that makes any kind of measurable difference? I am NOT saying it is not, I am simply asking if we can find a real pattern of anything (wealth, debt, happiness...take your choice) being measurably associated with access to oil, or being in any related to population per area (and you can either use as your defining of area a nation or a region or the whole earth, but if you use the whole earth you of course do away with the discussion of measuring disparity, you would be in effect saying "the per capita income of each person on earth is X" without considering the disparity created by say Warren Buffett or Bill Gates (and many other new rich billionaires).

So how does this relate to oil? That is where it gets complicated, because we have to look at a longer term picture. It is to be remembered that the U.S. was one of the largest producers of oil in the world until very recently, a fact that surprises many people, and we are still in the top 10 nations for oil production, and we share borders with two other sizable producers. Can this alone explain the U.S. wealth situation? In that case, your argument would be much stronger because if we take in a time lag from when we peaked and at least one of our border countries seems to be peaking (Mexico) then our wealth situation should get worse and our debt situation should get worse. And sure enough, for the time being, that is exactly what is happening!

BUT, we then would look at say China...which must import almost all of it's oil, or India...but the trend does not seem to working the same way for them...so we must assume there are many other factors at play, or at least some other factors.

So let us now for one moment try to consider the world situation. If we assume, as most folks on TOD do assume, that the world oil production maximum is at hand, then can we assume that the world debt will go up? Debt to whom? Frankly, we would be arguing about nominal numbers because the people of the planet earth has no one else to borrow from. Economically, Earth has no willing co-parties, so the "Earth" can be in debt $2.00 or $2 trillion dollars, or can make a number up, call it two zillion dollars...what could it matter? My point is, we can only owe each other, so it is absolutely an issue of distribution...and more. At the end of the day the relationship between debtor and creditor is essentially a power relationship. I hate to use the line Mao used ("power grows out the barrel of a gun") but it does in many ways apply here. But only to an extent...

We can most easily do this by way of example: In 1885, in a shop smaller than most attached garages are today a German built a motorized tricycle. Given the German environment of reasonably literate people who adapted to the then blooming industrial revolution and an infrastructure of small shops, machinists, poineers in electricity (it is to be remembered that Albert Einstein's father sold electric motors) the automotive/gasoline engine swept through Europe like wildfire.

It would probably not be so easy today. Costs of research and technical tools are higher. But just as a thought exercise, let is consider a small shop at a modest university somewhere in...pick a place...China? Let us assume a team of researching funded with just a sliver of all that excess American money they have received found the holy grail...nuclear fusion. We know it will work, it works in every star in the universe. We know that scientists believe in the idea...and that the nations of the world have and are spending billions on it at the ITER facility.

But what if one nation got there first, got there cheaply (by comparison) and got there on their own? Would this change the power balance vis-a-vis the nation to the world...the nation to other nations...and much more importantly, would this change the power of debt vis-a-vis oil or other energy? Put it another way: If a scientist who was always candid and honest, a person who had engaged in absolutely astounding research, who could show you tables and equations leading right up to the moment of actual fusion, essentially proving on paper that he had DONE IT, he had unlocked the key to affordable nuclear fusion, and every model, every computer simulation, every theory and every observation confirmed him on this, but...he could only know for sure if he could build it, and that would cost 1 trillion dollars.

If you (or your nation, a consortium, etc.) could provide the researcher and his team a trillion dollars, should you? What would the debt be worth? Remember that what you are giving the scientist is basically nominal paper, a debt, an ability to purchase, an obligation that his work can pay back the trillion and ten times the tillion, more...and you are simply incurring an obligation of paper for the greatest energy breakthrough in history...nominal debt for REAL WEALTH! We are in agreement that clean almost limitless energy would be the only REAL WEALTH we could hope for, right?

Remember that we have recently given the banks and financial institutions of the world easily more than a trillion simply to avoid a financial collapse...the trillion had already been spent on heaven only knows what (the lenders, insurers, stock and bond holders seemingly had little say in it, in fact very little knowledge of how the money was being spent in many cases), and there was NO PROMISE of a breakthrough, simply a threat hanging over the heads of the world population.

I will not argue that particular program here, but simply ask...how would debt on such a program compare to the building of let us say an interstate type highway system in China or India? Which would be the better use of debt?

These are questions the world must begin asking. Globalization does mean that the issues facing any nation have a way of facing every nation. Debt anywhere in the world finds it's way to debt everywhere in the world. Debt, it turns out, is fungible, as we found out so painfully in the recent financial crisis. The relationship of debt vis-a-vis oil vis-a-vis population vis-a-vis information/technology also seems to be very fungible. This does not mean that one has no relationship on the others, but it does seem to be a sliding scale...there does not seem to be a set of fixed relationships.

Again, I wish we could continue this discusion, and your efforts to get the whole idea of the relationship of oil to population/debt on the agenda I think is very valuable. I would be even more interested in looking at the broader issue of not just oil, but energy relationship to population/debt.

(brief aside: on http://www.prometheus.org/ they have have a quote..."solar is an economic inevitability". They say this because at the end of the day (no pun intended) every form of life goes back to the sun...or back to nuclear fusion if you prefer. All other methods are simply "bridge technologies" and we have always known this)

I think this discussion is imperative because if, IF we hope to transition away from fossil depletable energy to renewable energy we must work out the financial risk/reward/debt issue to make it happen. Energy/debt/population, and we seemingly agree on this, are the big variables. Thank you for a fascinating discussion!

Thats not something I've thought about and its really important. In the modern world debts have this nasty habit of being resold and spread throughout the world. This is existing debt. And of course the decision to create debt in a region or not is critical. A great example is Eastern Europe. I need to ponder this a bit its a really super important point !

Now as far as technology goes consider that with cheap abundant energy fiat currencies, basically all the money you could ever borrow and rapid technical expansion overall very little has trickled down from the top. Population has doubled and more over the last several decades yet the distribution of wealth has not changed a who lot. Globally with effectively every possible advantage we failed. Obviously a lot of what we did create was done with borrowed money not saved earnings from past production but promises against the future.

I just can't see a better outcome as cheap fossil fuels decline. Technology did not save us when we had all the advantages why should it save us as we face tremendous problems of large debts and dwindling energy supply ?

Every wealthy country in the world has its equivalent of Mexico geographically close. I'm not saying we won't attempt to win with technology but simple physical geography and the fact we failed to distribute in the past practically ensures that all it will do is sharpen the disparity between rich and poor.
Heck I might be on the wrong side of the tracks now myself :)

You have to show that somehow despite the fact we failed when we had everything we will succeed on a lot less. I just don't see it.

Obviously if you think about the relation esp given your idea of fungible debt.

debt=population/oil.

Assuming debt is forced to decline via both defaults and cut back of lending and oil is declining its fairly obvious that population must decline also.

It absolutely would have to no way around it. In a sense the silver bullet solution looks like this.

debt = population/(oil + silver bullet)

The silver bullet solution has to grow fast enough to cover the growing debt and growing popluation and shrinking oil supplies.

This suggests regardless of what it is it has to be of the same order of magnitude is the other variables which are simply huge !

Thus a real solution has to be huge or its simply not real but a partial solution for a ever smaller subset of the population. Everything I've seen presented as a solution seems to be something that can't even ensure the current wealthy population level remains constant much less effects the lower levels.

On a fraction of the people that are currently nominally wealthy will be wealthy in the future without a effective miracle. The wealth thats trickled outside of the former wealthy countries will no longer do so as they have their own swelling population of increasingly poor people to deal with.

Since we never distributed wealth even close to equally in the past your this buffer of new poor in the wealth countries even though it might number in the millions cuts off billions of people lower own in the pyramid. The trickle down stops !

It simply cannot be solved with a silver bullet.

Back to the equation.

debt=population/oil

The only viable solution is to shrink both debt and population as oil declines.

if it was this

-100=10/1 instead of 100000=10000000/100000

Then you have a sovable problem thats amendable to silver bullets and they really arent even that simply reinvesting past profits into renewable energy sources and efficiency gains. If we had recognized the problem early then its not a problem.

In fact its not even clear it makes sense to use oil if the population is small enough since bio and renewable electric solutions would have met our needs. We mess with smelly hard to get oil ?

Its two things a matter of scale and also a matter of buffer i.e stored wealth but the requirment to use stored wealth in my opinion practically results in equitable distribution of wealth over time.

Now with that said the only valid way out and it may or may not be possible is to stop population growth ASAP and drop consumption dramatically in the wealthy countries and believe it or not start increasing it in the poorest countries.

Level the playing field if you will. Birth rates are well correlated with wealth and I think that you could dramatically reduce the wealth held in the top nations without causing a spike in birth rates. Now the easiest way to do this is to simply open the borders and allow anyone to live and work were ever they wish.

At first of course it will be disruptive but I think the entire system would level out rapidly. So the US throws open its border with Mexico if Mexico opens its borders around the world everyone is allowed to live and work were ever they wish.

Obviously in the rich nations it would force the puplic transport and living arrangments to change to support people to poor with a car but the now slightly impoverished former rich ( wages will fall hard) can use the same transport.

Once you level things out I really don't see food being a issue and population growth should fall rapidly. Everyone is pretty much equal so any silver bullet is marketed to a homogenous market i.e its sold to poor people. And of course economies of scale work well and anything that really worked for everyone could be rapidly expanded.

You think thats going to happen ?

I don't think so but still if you buy into my equation then I think the only valid solution is the one I outlined. Of course as this happens not only are all the borders opened but all debt is forgiven and we restart our monetary system.

So there is always a way out and it probably lasts right up till things really fall apart and desperation makes such a solution impossible almost right to the very end we could still save ourselves but the only way we can is to save everyone on the planet no partial solution works. And people are simply to greedy to do it.

I have always been an open borders man myself, borders only work as long as most people want to stay where they are. There is no solution short of mass slaughter that will maintain a border if enough people want to move badly enough, I think the collapse of the Berlin wall and eastern Europe and the futility of trying to enforce the U.S. Mexican border are two examples.

On population, population growth has began to slow, but it is slowing faster in the richest countries, which will have the effect of making them even wealthier per capita!

On repricing debt, we have just seen an example of that, in which asset prices dropped considerably, meaning that the asset holders and their creditors all had to re-price the debt. Since not many Rwandans own suburban houses and new car loans are scarce in Chad, this must have been a re-pricing that occured in the prosperous nations. But of course the political pressure was too great to allow this to go on for long, so the prosperous nations refilled the money pumps with more currency in an attempt to re-inflate the bubble and thus the wealth disparity. Who knows how that will come out...

Leaving us with oil, or as you mentioned the possibility of "oil+silver bullet", whatever that may turn out to be. That is why I am such a supporter of solar or some other type of renewable. To the debate on nuclear, I have nothing against it, if it can be contained and commercially viable in this age of safety and caution.

The factor of scale and time are huge. I have no doubt that we are already behind on mitigation, even if you take the rosiest case scenario of peak and what the outlook will be on the downslope. We are simply going to have to settle on some plans, and if they are not perfect, so be it, but get building anyway. But then other factors kick in...

The recent collapse in price of first crude oil and then natural gas, one behind the other, has been very damaging to mitigation efforts. If it was hard to raise cash for mitigation and conservation before, it is even harder when any alternative must compete against almost givaway prices for fossil fuels. But we have to try to do what we can do. The population curve is pretty much built in for at least the next 3 decades. Without a complete collapse of the world economic order, the debt situation is likewise already priced into the picture. Only alternative energy and conservation have any chance at all of moving any targets in less than two or three decades. Nuclear could make a difference if we rushed it in an emergency program (as China and India seem to be doing) but we would still confront the issue of a suitable liquid fuel, which is where the real crisis will probably strike first. This is why the speed with which plug hybrid vehiclds are adapted to the transportation system is so crucial. they have to work and they must come into the fleet relatively fast.

memmel, I don't think we differ all that much on the big picture here, I just seem to have a rosier view of what information and technology can do than many folks do. I am well aware of my bias on that (I am the son of a family of mechanics after all!) and it may be a blindspot on my part that I need to work on. I do agree with you on this major point: Technology will absolute NOT correct the wealth inequality issue. That will have to be a conscious decision on the part of the power brokers (essentially the creditors as opposed to the debtors, and the financial power players, because they are the ones "informing" the elected representatives, who really know very little about complex finance themselves). I know this risks sounding corny, but the wealth distribution problem is essentially an ethical problem. This caused Albert Schweitzer (a man who confronted this issue in word and deed, and is now almost forgotten by the following generation for his efforts) to once state flatly, "The crisis of the West is essentially an ethical crisis."

Okay, my fingers are numb from typing, till next, thanks again for a very interesting and thought provoking discussion, I was overdue for one!

Yeah in the end I suspect most people will find that positions are not all that different and you nailed it with this quote.

The crisis of the West is essentially an ethical crisis.

Its a ethics problem and the more I dig the larger this problem looms.

Also I'd like to add you would be surprised at what I'd agree to if we really honestly decided to change. If its a choice between the end of civilization and building Coal fired electric plants with no pollution controls then do it.
But only if its critical to the success of meaningful and real change.

No matter what we do given how long we have not done anything to fix the world we probably will have to do more damage even to implement a solution. When we actually try then its time to consider what has to be done even the most distasteful solution unfortunately cannot be discarded. I'm very pragmatic and recognize doing the right thing is not without consequences.

But make all the required ethical changes first and then and only then is it time to start talking about how we transition. To a large extent I'm actually on board with various silver bullet concepts if we made the ethical leap. But the social/ethical transition has to proceed the creation and implementation of a true solution. My only real argument is attempts to avoid this are certain to fail and unfortunately I also feel that unless people believe they have no choice they won't make the painful ethical changes. So...

At some point this log jam will break when it finally does we will know which way the decision went until then all you can do what you can to at least give some hope we might make the right choice.

"We are on the front of a wave of technological change that will make the 20th century look like a dark age."

Please name a couple of these technologies and make your case for each. Is there anything on the horizon to compete with electrification? Can we top agricultural mechanization which allows 2% of the population to feed everyone? How can we overcome the approach of the Second Law limits, that is, getting higher efficiency out of energy to work or chemical conversions that will overcome the decreasing concentration of mineral ores?

The other factor is time. New transportation infrastructures took a century or more to implement, such as roads and railroads. Electricity took 100 years from discovery of electromagnetism to make a significant penetration into US households. In 100 years we will have no ores left for industrial metals, no oil and little if any natural gas and coal.

Perhaps it is significant that per capita oil consumption peaked just after man set foot on the moon.

Lyondell went bust in January. I don’t know if the old Sinclair-Arco-Lyondell refinery in Houston is still running. I can’t remember the output but it is high. The Cat cracker was built in the 50’s. Most of the refineries here are so old they needed to replaced years ago. The Alaska pipeline is underground except where there is tundra.

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